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Many people do not know that the loan does not go away when you defease it. In fact, the loan continues to exist until the maturity date of the loan or a short period prior to the maturity date. On the date that your property is sold or refinanced, the old loan is actually assumed by another entity which is usually controlled by either the loan servicer or a defeasance consultant like DefeaseIt. Since you are not going to have to worry about the loan anymore-who cares? You should, because the Successor Borrower makes money and DefeaseIt will share this money with you while the loan servicer will not. But how does the Successor Borrower make money? The answer is float interest. Bonds must be bought and cashed-in to make the payments on the loan each month. That means that the bonds must mature prior to the date of each monthly loan payment. That money is deposited into a money market account that earns interest which we call the float interest. The float interest is especially significant with respect to the balloon payment at the end. Say that you have a $20,000,000 balloon payment at the end of the loan, but the only matching bond matures 20 days before the balloon payment is due-in this case the Successor Borrower earns interest on $20,000,000 for 20 days. At 4.5% interest that's $49,315. That is a significant amount of money to anybody. You wouldn't want the loan servicer to pocket that when you could have the opportunity to share in it. Remember that float income is generated by the inefficiencies of the market to provide securities that match directly with loan payment dates. So, while you can benefit from the float income, it is more cost effective to have a loan that can be defeased more efficiently, resulting in less float interest. However, in the event that there is float interest at the end of the loan, DefeaseIt, when acting as the Successor Borrower, willing and openly shares this residual income with every client. We are happy to give you a free and accurate defeasance quote, based on an actual portfolio of securities, to determine if your transaction should produce residual income.
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